| LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES | NOTE K – LOANS RECEIVABLE, NET AND RELATED
ALLOWANCE FOR LOAN LOSSES Loans receivable,
net were comprised of the following:
December 31, September 30,
2020 2020
(In thousands)
One-to-four family residential $ 208,404 $ 210,360
Commercial real estate 260,296 248,134
Construction 23,441 28,242
Home equity lines of credit 19,837 19,373
Commercial business 91,215 100,993
Other 3,837 4,157
Total loans receivable 607,030 611,259
Net deferred loan costs (1,370 ) (1,749 )
Allowance for loan losses (7,130 ) (6,400 )
Total loans receivable, net $ 598,530 $ 603,110 The Bank is a
participant in the Paycheck Protection Program (“PPP”), which was designed by the U.S. Treasury to provide liquidity
using the SBA’s platform to small businesses and self-employed individuals to maintain their staff and operations through
the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds
are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The
PPP loans, which are included with the commercial business loans in the table above, bear a fixed rate of 1.0% and loan payments
are deferred for the first 10 months following the covered period, which is eight to twenty-four weeks following the date the loan
is made. The Company originated 350 “First Draw” loans totaling $56.0 million through December 31, 2020 for which it
received $2.0 million in origination fees from the SBA. These fees are being amortized over the expected life of the loans, which
is two years for loans originated prior to June 4, 2020 and five years for loans originated June 5, 2020 or later. Through December
31, 2020, 48 loans totaling $10.0 million had been forgiven by the SBA. On December 27,
2020 the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid”) Act was signed into law,
extending the SBA’s authority to guarantee Second Draw PPP loans, under generally the same terms and conditions available
under the First Draw program, through March 31, 2021. In order to qualify for a Second Draw PPP loan, an applicant must have experienced
a revenue reduction of at least 25% in 2020 relative to 2019. The Company expects to provide Second Draw PPP loans to its eligible
customers. The Economic Aid Act also expanded the eligible expenditures that a business could use PPP proceeds for and provided
for a simplified forgiveness application for PPP loans $150,000 or less. The segments
of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The
residential mortgage loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens,
and home equity lines of credit, which are generally second liens. The commercial real estate loan segment is further
disaggregated into three classes: loans secured by multifamily structures, owner-occupied commercial structures, and non-owner
occupied nonresidential properties. The construction loan segment consists primarily of loans to developers or investors
for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four
family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which
a residential dwelling is to be built. Construction loans to developers and investors have a higher risk profile because
the ultimate buyer, once development is completed, is generally not known at the time of the loan. The commercial business
loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists primarily
of revolving lines of credit. The other loan segment consists primarily of stock-secured installment consumer loans, but also
includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts. Management evaluates
individual loans in all segments for possible impairment if the loan either is in nonaccrual status, or is risk rated Substandard
and is 90 days or more past due. Loans are considered to be impaired when, based on current information and events,
it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment
status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Once the determination
has been made that a loan is impaired, the recorded investment in the loan is compared to the fair value of the loan using one
of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate;
(b) the loan’s observable market price; or (c) the fair value of the collateral securing the loan, less anticipated selling
and disposition costs. The method is selected on a loan by loan basis, with management primarily utilizing the fair value
of collateral method. If there is a shortfall between the fair value of the loan and the recorded investment in the loan,
the Company charges the difference to the allowance for loan loss as a charge-off and carries the impaired loan on its books at
fair value. It is the Company’s policy to evaluate impaired loans on an annual basis to ensure the recorded investment in
a loan does not exceed its fair value. The following
tables present impaired loans by class, segregated by those for which a specific allowance was required and charged-off and those
for which a specific allowance was not necessary at the dates presented:
Impaired
Loans with
Impaired Loans with No Specific
Specific Allowance Allowance Total Impaired Loans
Unpaid
Recorded Related Recorded Recorded Principal
December 31, 2020 Investment Allowance Investment Investment Balance
(In thousands)
One-to-four family residential $ — $ — $ 2,378 $ 2,378 $ 2,378
Commercial real estate 599 10 3,736 4,335 4,335
Construction 1,745 29 2,835 4,580 4,645
Commercial business — — 1,903 1,903 1,903
Total impaired loans $ 2,344 $ 39 $ 10,852 $ 13,196 $ 13,261
Impaired
Loans with
Impaired Loans with No Specific
Specific Allowance Allowance Total Impaired Loans
Unpaid
Recorded Related Recorded Recorded Principal
September 30, 2020 Investment Allowance Investment Investment Balance
(In thousands)
One-to-four family residential $ — $ — $ 2,601 $ 2,601 $ 2,601
Commercial real estate 599 46 3,806 4,405 4,405
Construction 2,306 175 2,835 5,141 5,206
Commercial business — — 2,014 2,014 2,218
Total impaired loans $ 2,905 $ 221 $ 11,256 $ 14,161 $ 14,430 The average
recorded investment in impaired loans was $13.7 million and $9.4 million for the three months ended December 31, 2020 and 2019,
respectively. The Company’s impaired loans include delinquent non-accrual loans and performing Troubled Debt Restructurings
(“TDRs”), as TDRs remain impaired loans until fully repaid. There was one TDR totaling $218,000 during the three months
ended December 31, 2020 and there were no TDRs during the three months ended December 31, 2019. The following
tables present the average recorded investment in impaired loans for the three months ended December 31, 2020 and 2019. There was
no interest income recognized on impaired loans during the periods presented.
Three Months
Ended December 31, 2020
(In thousands)
One-to-four family residential $ 2,490
Commercial real estate 4,370
Construction 4,861
Commercial business 1,959
Average investment in impaired loans $ 13,680
Three Months
Ended December 31, 2019
(In thousands)
One-to-four family residential $ 1,401
Commercial real estate 3,608
Construction 2,900
Commercial business 1,467
Average investment in impaired loans $ 9,376 Management uses
a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are
considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management
generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are
potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans
in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility
that some loss will be sustained if the weaknesses are not corrected. Loans classified
Doubtful have all the weaknesses inherent in loans classified Substandard with the added characteristic that collection or liquidation
in full, on the basis of current conditions and facts, is highly improbable. To help ensure
that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has
a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential
mortgage loans are included in the Pass categories unless a specific action, such as severe delinquency, bankruptcy, repossession,
or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for
the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Asset Review
Committee performs monthly reviews of all commercial relationships internally rated 6 (“Watch”) or worse. Confirmation
of the appropriate risk grade is performed by an external loan review company that semi-annually reviews and assesses loans within
the portfolio. Generally, the external consultant reviews commercial relationships greater than $500,000 and/or criticized
relationships greater than $250,000. Detailed reviews, including plans for resolution, are performed on loans classified as
Substandard on a monthly basis. The following
tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention,
Substandard and Doubtful within the Bank’s internal risk rating system at the dates presented:
Special
Pass Mention Substandard Doubtful Total
(In thousands)
December 31, 2020
One-to-four family residential $ 206,680 $ — $ 1,724 $ — $ 208,404
Commercial real estate 253,958 2,735 3,603 — 260,296
Construction 18,861 — 4,580 — 23,441
Home equity lines of credit 19,837 — — — 19,837
Commercial business 89,521 176 1,518 — 91,215
Other 3,837 — — — 3,837
Total $ 592,694 $ 2,911 $ 11,425 $ — $ 607,030
Special
Pass Mention Substandard Doubtful Total
(In thousands)
September 30, 2020
One-to-four family residential $ 208,658 $ — $ 1,702 $ — $ 210,360
Commercial real estate 242,003 2,623 3,508 — 248,134
Construction 23,101 — 5,141 — 28,242
Home equity lines of credit 19,373 — — — 19,373
Commercial business 98,967 178 1,848 — 100,993
Other 4,157 — — — 4,157
Total $ 596,259 $ 2,801 $ 12,199 $ — $ 611,259 Management further
monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length
of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging
categories of performing loans and nonaccrual loans at the dates presented:
30-59 60-89
Days Days 90 Days + Total Non- Total
Current Past Due Past Due Past Due Past Due Accrual Loans
(In thousands)
December 31, 2020
One-to-four family residential $ 207,027 $ 433 $ — $ 944 $ 1,377 $ 944 $ 208,404
Commercial real estate 255,777 1,000 397 3,122 4,519 3,122 260,296
Construction 18,861 — — 4,580 4,580 4,580 23,441
Home equity lines of credit 19,837 — — — — — 19,837
Commercial business 89,697 — 123 1,395 1,518 1,395 91,215
Other 3,837 — — — — — 3,837
Total $ 595,036 $ 1,433 $ 520 $ 10,041 $ 11,994 $ 10,041 $ 607,030
30-59 60-89
Days Days 90 Days + Total Non- Total
Current Past Due Past Due Past Due Past Due Accrual Loans
(In thousands)
September 30, 2020
One-to-four family residential $ 209,455 $ — $ — $ 905 $ 905 $ 905 $ 210,360
Commercial real estate 245,029 — 886 2,219 3,105 2,219 248,134
Construction 23,101 — — 5,141 5,141 5,141 28,242
Home equity lines of credit 19,373 — — — — — 19,373
Commercial business 99,397 — 129 1,467 1,596 1,467 100,993
Other 4,157 — — — — — 4,157
Total $ 600,512 $ — $ 1,015 $ 9,732 $ 10,747 $ 9,732 $ 611,259 An allowance
for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s
continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions,
diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing
loans (“NPLs”). The Bank’s
methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for
impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency
Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. Loans that are
collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances,
historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified
by other qualitative and economic factors. The loans are
segmented into classes based on their inherent varying degrees of risk, as described above. Management tracks the historical
net charge-off activity by segment and utilizes this figure, as a percentage of the segment, as the general reserve percentage
for pooled, homogenous loans that have not been deemed impaired. Typically, an average of losses incurred over a defined number
of consecutive historical years is used. Non-impaired
credits are segregated for the application of qualitative factors. Management has identified a number of additional qualitative
factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit
losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are
evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources include: national
and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and
terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral;
and concentrations of credit from a loan type, industry and/or geographic standpoint. Management reviews
the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments
to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly
charged off against the ALL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically
there is no portion of the ALL for loans individually evaluated for impairment. The following
table summarizes the ALL by loan category and the related activity for the three months ended December 31, 2020:
One-to-Four Home Equity
Family Commercial Lines of Commercial
Residential Real Estate Construction Credit Business Other Unallocated Total
(In thousands)
Balance- September 30, 2020 $ 1,035 $ 3,232 $ 672 $ 179 $ 1,034 $ 1 $ 247 $ 6,400
Charge-offs — — — — — — — —
Recoveries — — — — 90 — — 90
Provision (credit) 120 176 (202 ) 88 592 1 (135 ) 640
Balance- December 31, 2020 $ 1,155 $ 3,408 $ 470 $ 267 $ 1,716 $ 2 $ 112 $ 7,130 The following
table summarizes the ALL by loan category and the related activity for the three months ended December 31, 2019:
One-to-Four Home Equity
Family Commercial Lines of Commercial
Residential Real Estate Construction Credit Business Other Unallocated Total
(In thousands)
Balance- September 30, 2019 $ 731 $ 2,066 $ 511 $ 138 $ 1,184 $ 8 $ 250 $ 4,888
Charge-offs — — — — — — — —
Recoveries 2 — — — — — — 2
Provision (credit) (26 ) (147 ) 63 2 311 (6 ) 13 210
Balance- December 31, 2019 $ 707 $ 1,919 $ 574 $ 140 $ 1,495 $ 2 $ 263 $ 5,100 The following
tables summarize the ALL by loan category, segregated into the amount required for loans individually evaluated for impairment
and the amount required for loans collectively evaluated for impairment as of December 31, 2020 and September 30, 2020:
One-to-Four Home Equity
Family Commercial Lines of Commercial
Residential Real Estate Construction Credit Business Other Unallocated Total
(In thousands)
Allowance for Loan Losses:
Balance - December 31, 2020 $ 1,155 $ 3,408 $ 470 $ 267 $ 1,716 $ 2 $ 112 $ 7,130
Individually evaluated
for impairment — 10 29 — — — — 39
Collectively evaluated
for impairment 1,155 3,398 441 267 1,716 2 112 7,091
Loans receivable:
Balance - December 31, 2020 $ 208,404 $ 260,296 $ 23,441 $ 19,837 $ 91,215 $ 3,837 $ — $ 607,030
Individually evaluated
for impairment 2,378 4,335 4,580 — 1,903 — — 13,196
Collectively evaluated
for impairment 206,026 255,961 18,861 19,837 89,312 3,837 — 593,834
One-to-Four Home Equity
Family Commercial Lines of Commercial
Residential Real Estate Construction Credit Business Other Unallocated Total
(In thousands)
Allowance for Loan Losses:
Balance - September 30, 2020 $ 1,035 $ 3,232 $ 672 $ 179 $ 1,034 $ 1 $ 247 $ 6,400
Individually evaluated
for impairment — 46 175 — — — — 221
Collectively evaluated
for impairment 1,035 3,186 497 179 1,034 1 247 6,179
Loans receivable:
Balance - September 30, 2020 $ 210,250 $ 248,134 $ 28,352 $ 19,373 $ 100,993 $ 4,157 $ — $ 611,259
Individually evaluated
for impairment 2,601 4,405 5,141 — 2,014 — — 14,161
Collectively evaluated
for impairment 207,649 243,729 23,211 19,373 98,979 4,157 — 597,098 The allowance
for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the segmentation
of the loan portfolio into homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the
consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the
portfolio at any given date. A Troubled
Debt Restructuring (“TDR”) is a loan that has been modified whereby the Bank
has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Bank to maximize the ultimate
recovery of a loan. TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan
is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted generally
include, but are not limited to, interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment
of principal. A default on a TDR loan for
purposes of this disclosure occurs when a borrower is 90 days past due or a foreclosure or repossession of the applicable
collateral has occurred. There was one TDR for the three months ended December 31, 2020, and there were no TDRs for the three
months ended December 31, 2019. The TDR during the three months ended December 31, 2020 was performing in accordance with its
restructured terms at December 31, 2020.
Three Months Ended December 31, 2020
Number of Investment Before Investment After
Loans TDR Modification TDR Modification
(Dollars in thousands)
One-to four-family residential 1 $ 218 $ 249
Total 1 $ 218 $ 249 |
